Transcript
Una Jefferson: You’re listening to compliance Insights podcast by Nimonik. We discuss all things related to compliance with environmental health and safety and quality rules. I am Una Jefferson. South Africa is in the process of tightening up its financial provisioning rules for the mining sector. These essentially require companies to set aside money to clean up and close mines properly and are meant to protect against mine abandonment. New rules were passed in 2015 and were met with opposition from the mining sector as well as some other stakeholders. Now, proposed replacement rules had been on the table since the end of 2017. I spoke with Professor Tracy Lynn, Humby from the University of Witwatersrand Johannesburg School of law about the proposed changes and what we can expect from South Africa’s mine closure regime in the future.
Una Jefferson: Professor Tracy Lynn Humby. Thank you so much for coming on the podcast. It’s great to have you. So to begin briefly, can you just describe what the problem is that these proposed financial provisioning regulations are intended to address?
Professor Humby: So similarly to financial provisioning regulations elsewhere in the world, they are intended to address the problem of operator defaults on completing their mine, rehabilitation and closure plans. Mine closure is a core business activity of mining companies. The International Council of mining and metals has confirmed this, but in certain cases the mining proponents will default and so these regulations are intended for the mining company to set funds aside so that funds are available to do the work that is required.
Una Jefferson: And similar rules, financial provisioning regulations were passed in 2015. Um, so why are new ones being proposed so soon afterwards?
Professor Humby: So that’s correct. The ones in 2015 were the first regulations passed by the Department of Environmental Affairs. In Southern Africa, we implemented a new system called the single environmental system where the Department of Environmental Affairs work for the Department of Mineral Resources (DMR). And so the 2015 regulations were the first set of regulations that the Department of Environmental Affairs put out, I think that they felt that there hadn’t been enough consultation around those regulations and there was also a bit of industry push back and so they initiated another consultative process and they’ve been working very closely with the DMR and a set of key stakeholders to know, get very detailed and I think a state of the art, financial provisioning regulations in place.
Una Jefferson: So let’s talk about some of the concrete changes that have been made. Um, one, one change that I’ve read about has been a change in the definition of, of applicant, which basically affects who is, who is affected by these regulations. Um, so can you just describe who, who is affected by these regulations and uh, what was this change in definition and, and how did it affect the group? The regulated community?
Professor Humby: So essentially any new, any new application for mining rights or mining permits will need to comply with these regulations by setting aside the required quantity of funds. Existing holders are also caught in the net. So even though they might’ve begun mining before the regulations came into effect, they’re also now required to comply with the regulations. And then the new addition to the 2017 draft is to include applicants for either transfers of mining rights or for amendments of mining rights.
Una Jefferson: How would this affect, um, mining liability for, for mines that have had their ownership transferred in the past before the regulations came into effect?
Professor Humby: So it would not apply prospectively to new transfers, but any existing holder of mining permit needs to comply with the new regulations.
Una Jefferson: Um, so as I understand it, the very basic way these financial provisioning works is that um, a certain amount of money is required to be set aside, progressively by the mining company so that there is enough money when it comes time to rehabilitate, um, environmental effects or eventually closed the mine. Um, so there is the issue of determining how much money is the right amount of money. Um, so how would these draft regulations change the way in which these costs of rehabilitation or closure or estimated.
Professor Humby: It’s one of the major areas of mine closure studies. What the regulations say is that you first need to set the closure objectives very clearly. And what is innovative about the 2017 regulations is that the closure objectives must be made with stakeholders, it doesn’t define stakeholders, but it includes a more diverse array of parties. It really is trying to get mines to progressively rehabilitate. So instead of looking ahead and saying in three years time, what are the costs going to be and then applying something like a net present value calculation, it’s requiring companies to cost year by year and then also to take into the account if you’re going to have immediate closure. These figures have to be approved every single year. I think that is what makes these regulations different from anywhere else in the world. There was going to be an annual process of reviewing and auditing of these amounts.
Una Jefferson: Okay. So, so to what extent would the costs that were determined by this process be standardized across different mining projects versus a, you know, differing between mining projects depending on the community around them. And the context.
Professor Humby: So the regulations are not specific in that regard, there is only one generic way. It just depends on what the enclosure objective is. It doesn’t say, it doesn’t specify that it’s just for chemical stability or establishment of ecosystems. It’s really is depending on what the stakeholders are going to agree to. Otherwise there’s no sort of standard for different commodities or in terms of time, it’s just one generic procedure.
Una Jefferson: Um, and once, once these costs have been determined, a lot of the meat of these regulations concerns the different types of financial vehicles that can be used and the way they might be designed. Uh, so I’ve, I’ve seen distinctions made about how long money is held and you know, how, how the government can access it, for example. And also what types of financial vehicles like trust funds, for example, might be used. So for first of all, for our listeners who find this a bit dry, why do these distinctions or details matter for whether it’s for companies who might be concerned with cost or cash flow, but also why do they matter for mine, care and cleanup outcomes and then what are, what are the changes that are proposed on the table?
Professor Humby: So the financial vehicle affects because it can affect the liquidity and the creditworthiness of a mining company. So the mining industry would prefer softer forms of financial assurance, which wouldn’t necessarily require sitting aside those funds. So an example of that would be a balance sheet check or a parent company saying that no its fine, closure is going to be dealt with, but South Africa we have taken a harder, stricter approach. We have financial vehicles that are, you know, it includes cash in a bank or a trust fund or or closer rehabilitation company or insurance or a financial guarantee. Those are the five vehicles that, that we’ve used in. It is really tipping the scales in favor of making sure that there is going to be money available for the state to use if the operator defaults. And in a major change in the 2017 regulations is that prior to this 2015 regulations restricted the trust fund for residual negative impacts and our trust fund can be used also for final closure, decommission class and it adds the possibility of a closure rehabilitation company as well as insurance. So we can, it would be interesting to see what kinds of products, especially from insurance are going to be given from the market.
Una Jefferson: And you mentioned earlier a latent and residual impacts. Uh, so these, I believe are a feature that was introduced in the 2015 rules, and I believe is still present in the draft regulations. Uh, so what are these, how would they be determined? And what would be the extent of that liability for mining companies?
Professor Humby: So latent impact is an impact that hasn’t yet materialized, although it is possible to occur at the the closure certificate is obtained and a residual impact is one that is known and it’s already present, but needs to be managed after that relinquishment phase. The regulations require companies to cost for those to estimate those costs. That’s included as part of the financial provision. Um, and so although they’re required to cost for it, the actual dealing with it management which stuff to the state because the financial business shifts the state once a closure certificate has been issued. So everything rests on the closure certificate that has been issued.
Una Jefferson: Could you give me some concrete examples of what a latent impact might be or a residual impact?
Professor Humby: So latent impact would be the emergence of acid mine drainage, which is a problem that occurs with water. It’s a well known problem associated with mined out areas. The water reacts was the rocks and the chemicals and the rocks. And you get a very acidic solution that is extremely damaging to ecosystems and also to human health. And that requires usually long term remediation and treatments. Residual impact would be something like a large tailing storage facility. And so they’ll cut the underground contamination that comes with it.
Una Jefferson: So from, from my reading, another frequent criticism of the rules that existed before 2015 was that they were infrequently enforced. Um, so do you have a sense of how enforceable the proposed rules are in comparison?
Professor Humby: So prior to 2015, I don’t think there was any enforcement, not just infrequent enforcement. They were brought against the sand mining company, but a very small sand mining company. So the hope is that these new regulations will be enforced and then there are different layers of measures to promote compliance. So for example, every year mining companies will need to submit their financial provision estimates. It must be done by a specialist and it must be audited by an independent third party. That’s the first layer of enforcement. The next would be the companies reporting on the financial audit on their closure liability that is included in the regulations and then you have criminal offenses and one of the unusual additions in the 2017 regulations is that they also criminal offenses for financial institutions. If the financial guarantee lapses, for instance, and the bank, does not notify the minister, that financial institution is also going to become reliable.
Una Jefferson: And you mentioned before that these, these regulations were kind of on the stricter side in comparison to mine closure rules elsewhere in the world. Um, can you just flesh out how do these proposed regulations compare to closure rules elsewhere in the world in general?
Professor Humby: So from a developing country perspective, I think these are the most detailed financial provisioning rules and they really are trying to, to push the envelope. For example, one thing is around transparency. In many jurisdictions financial provisioning is not made available to the public, but these regulations require mining companies not only to actually publish the financial divisions every year in a newspaper, but then also to make it available on their websites.
Una Jefferson: And finally, what can we expect from the final rules? Um, what, what types of changes might we see before this draft becomes final. And when might we expect the final regulation?
Professor Humby: The consultative process has already been going on for some time. There has been a, hiccup with the death of our minister of environment. Hopefully that would not affect the passage of these regulations we will hoping that they would be finalised last by the end of the year.
Una Jefferson: Okay. Well thank you very much professor Humby. I really appreciate your time.
Professor Humby: Pleasure. Thank you.
Una Jefferson: Thank you for listening to compliance insights, a podcast by Nimonik. If you have questions, comments, or topics you’d like to hear discussed, we would love to hear them. So send me an email at ujefferson@nimonik.com. That’s N I M O N I K .COM You can find us and subscribe wherever you get your podcasts or online at nimonik.com.
